Teneo AI AB (publ) (TENEO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Artificial Solutions International AB Q1 2022 Conference Call. [Operator Instructions] I would now like to turn the conference over to Per Ottosson. Please go ahead.

Thank you very much, Natalie. So good morning all. It's nice to see you this morning as we're going to go through the Q1 2022 results, which, of course, is our first real SaaS quarter. We started this journey at the tail end of Q1 last year, so it's really good to be able to take stock of where we stand. The presentation, you can find that on Investors on our site, on artificial-solutions.com, and you'll be able to find it there on the Quarterly Reports, so that you can follow along. So I'm going to now switch to Slide #2. And today, there's going to be 2 people presenting. It's me, the CEO of Artificial Solutions. I have a long background from this industry, also a relevant background from the largest player in this particular industry, the conversational AI space, which Artificial Solutions is in. And Fredrik Torgren, also a lot of experience from both the software side and the finance side, is our CFO. And he's going to bring us -- also be presenting part of the numbers for today. So with that, I'm going to dive right in and I'm going to be on Slide 3. So this is the market that Artificial Solutions is in, and it's called conversation [Technical Difficulty]

Mr. Ottosson, we can't hear you anymore. Please make sure that your phone is not muted. Ladies and gentlemen, we apologize for the interruption. We have a technical issue. Please hold the line. Ladies and gentlemen, thank you for holding. I will now hand you back over to Per Ottosson. Please go ahead.

Okay. I'm sorry all. I am in Barcelona, and apparently being on 4G was a bad idea. So I switched to 3G, and hopefully, this will sound better. So initially, I think you probably heard this. So I am the CEO of the company, I'm going to be presenting; and then Fredrik Torgren, our CFO. I was on the Slide 3, where we're talking about our market. And I'm going to start from there. So -- and again, all this is on our investor site, the presentation. So conversational AI is about coming into a system through voice or text in any channel that you could choose, WhatsApp, iMessage, speech, text, phone call. And you come in and you ask something that's called a service request, an information request, an action request. And the conversational AI solution takes that request and first interprets what it is the person wants, what language are they using, are the people, places, details mentioned and what kind of requests are we -- are they looking for, a service, an action, an information. Do they seem happy, upset, et cetera, have we interacted before. Then the conversational AI can take action. That differentiates us from many of the other conversational AIs out there, is that we -- most of our customers have built -- well, actually, all our customers have built, so they also take actions. So it might be that you want to buy a car, and the conversational AI will lead you all the way into the test drive, the lease quote or even buying the car in cash. And so this is our space. It's a $14 billion market for software, with a CAGR of 22%. There is no clear market winner in this space today. And of course, we are aiming to be that market winner. As I said in the beginning, I'm not sure if you heard that, but this is our first quarter where we have a year of comparison of our SaaS model, since we put our SaaS model into play in Q1 of last year. So we're starting to report on SaaS numbers this quarter. We do have a legacy business, which was to sell software licenses, plus professional services, and that's part of our total revenue. And then we have recurring revenue, which is where customers pay for transactions. Then we have our SaaS revenue, which is the revenue where people pay for seats to develop and they pay for API. And that's what we're selling going forward. So if you look at the left, we founded -- we're a 20-year-old company at this point, which is actually quite important in this space. First of all, we have a lot of data. Second of all, we have some of the foundational patents in this space because of -- we've been around for a long time. And we made -- many of the mistakes that our competitors are doing now, we already did in 2008 then to 2014. We came out on the NASDAQ in a reverse takeover in 2019. So our stock price was never what you see. And around from there on the first -- if you look back 3 years, it looks like we had a huge stock price. That's not true. That's the old company that we -- where we took the listing from. Our conversational AI platform is called Teneo, and it is in this conversational AI space, which I just explained. And it differentiates here because we allow customers to build their own solutions on top of Teneo. And we help them in the support of languages, 86 languages, for example, and make it much easier for them to build and deploy and also enhance that solution once it's deployed. We're still in the shift from a traditional license usage model, to a pure Software as a Service. But our Software as a Service ARR, I'm very happy to say, in March 2022 is $12.9 million. And this is after 1 year of that model being in the market. So I'm very happy with that development. And our patent and IPR portfolio, also we released that in Q1 for valuation by a company called OxFirst of SEK 1.6 billion. Bottom left, you see some of our blue chip customers, it's primarily large customers, large enterprises, with lots of customer interaction, that choose to work with us. And they are across several industries. The most prominent industries being retail, telco and Internet-native companies, so companies that might be smaller but still have a lot of interaction because of their reach in the digital business model. Strategic partnerships, several that -- I will highlight 2 of them, the CGI, that also delivered a nice deal this quarter; and CSG, who is -- who has some of our larger customers and are implementing those. And then, of course, Microsoft, which is our closest ally and partner, and we do a lot of these enterprise deals. We are working together with the Microsoft salespeople. We get commission when we do a deal since we are basing our SaaS on top of their Azure cloud. So we're something called an IP Co-Sell partner of Microsoft. Looking to the right, at the top right, of course, this is a top line number. So the amount of SaaS API calls grew with 84%. Now that's a key revenue driver for us. It's obviously not going to grow 84% every quarter, but it shows that it's definitely growing. There's seasonality in how this grows, so many of our customers are using the system to do things like customer care. And if you do customer care, of course, there's going to be peaks. And Christmas is always a peak, so December always has a larger number. So some of these, also [ end of December ] quarter, have a larger number of interactions. So we're not going to see 84% growth quarter-over-quarter, but we're definitely seeing that the model is growing, so we're going to be seeing growth in the API call revenue going forward. And that's quite key, and this is the key metric, of course, that we measure ourselves on, the usage of our platform. So 5.5 million API calls in this platform that we really took live at the tail end of Q2, I would even say, beginning of Q3 last year, is when we took that platform live. So very happy with that development, and the platform is delivering very, very well, also in the high volumes. Some of the other highlights here. Skoda just announced that they're expanding into 13 new regions with the solutions. Skoda actually manages to sell cars built upon the Teneo solution. So a customer comes in, and instead of meeting a [ drive configurator ], where they have to choose the engine first, the customer gets to do a needs-based -- follow a needs-based conversational flow, where they could say, hey, I want a red car, or I need a car where I can fit my dogs in it, maybe call 2 car seats. And they go from there, oh, it should be electric, and so forth. And then this actually is a way that many car buyers today want to buy cars. So that is a quite successful usage of the technology. We saw in Swisscom that we're still on an 18-point tNPS increase. Meaning that if a human picks up the phone at Swisscom or the bot picks up the phone, so the bot being built on Teneo, there's a tNPS increase of 18 points. And this is across now roughly 6 million calls that have been answered by the bot. So it's a very interesting statistic. It actually means humans prefer talking to the bot now. They probably don't, but the bot answers a lot faster. It gives the response a lot faster, which is why they also view this as a better way to communicate. And we have a very large renewal rate of over 95%. And we also saw that we had 4 customers renew in Q1 2022. It is an annual renewal cycle, although we -- the revenue comes in month-by-month. There is an annual renewal cycle from those customers since they have an enterprise buying pattern. They need to make annual contracts. But we do consider that customers are unlikely to leave us once they started building on top of the platform. This would be crude, but there's no real reason to leave the solution and do that work as it's delivering good ROI. So I'm moving now to slide -- the next slide, which I believe now is Slide 4, actually not by numbers, but it says executive management. I just want to highlight across this that it's a seasoned management team. And a large portion of us come from this company, Amelia, where we built a very large business that's valued at about the SEK 13 billion today in the same space, a slightly different orientation, but definitely the same market. And then a few of us have other backgrounds that are quite complementary, from Snowflake. And we also have, of course, Andreas, has been with us from the beginning, our CTO. Q1 operational highlights. This is very good to be able to now share some SaaS numbers finally after the full year of running this model. The monthly SaaS API calls went up 84%, as I said before. Of course, it's not an indicator it will go up 84% every quarter, but it will definitely grow. And it grows from a fairly healthy base now going forward. So very happy that the platform is delivering, very happy that the customers are increasing their volumes with us. The non-SaaS customers increased their volumes as well, and that was at roughly 19%. So these are the ones who are not paying in our SaaS revenue model. They're paying still in the old revenue model. It could be per call or there's some other metric as it's not related really to -- not fully related to the volume [ of the new ] model. But still, the volumes that they do with us is increasing, which is also really good for us. Our SaaS ARR was SEK 12.9 million as of March 2022. This is a growth. So this is the revenue where customers pay per API call and per development seat. This is our new model. Fredrik will also go into that a bit more later. But that means that we -- if you take that last month and take that times 12, of course, that's the ARR number. That's SEK 12.9 million as of March 2022. I'm very happy with that. That's developing in the right direction. That is, of course, our key metric, and that's the 37% growth since December 2021. Recurring revenues that we have reported and that you may or may not remember that we've been using adjusted numbers because of this shift in models. But this is the reported number, SEK 8.8 million, that's also growth, 34%. So this is the growing revenue from, let's say, the legacy model, so that's also growing. So a very strong message from our customers that they like our solution and keep adding volume to the solution. We have 23 customers in total, 13 are now in the SaaS revenue model, so they're paying for the seats and the APIs. We have 4 renewals in the quarter and also 1 new customer in Q1. Now the 1 new customer, it may sound like that's not a whole lot, but it is very large customers that we're targeting and we see that customers have very good growth after year 1. So we're very happy with this client, that is a health care provider. We're not allowed to mention the name, but very, very large, let's put it that way. I would probably [ maybe even -- yes ], but absolutely, in the top 3 globally. U.S. sales team, we put in place, this is after the quarter, they hit the market in the beginning of Q2. It's 4 people now in the U.S. selling and quite a rapid takeup there in getting a Sales VP into place, Sean McIlrath, a very good recruitment, and then a whole team with him. So I'm very happy with that, and they're already out there in the market. The large American global tech company, that we're also not mentioning the name of, they renewed their SaaS agreement beginning in Q2 2022. That's another sign that this is really -- that's a very heavy competitive account. But still, there wasn't really any discussion about renewal since once you started building, you really see the value of the solution and the ROI. They have published their ROI, and it's $39 million, which are an investment for this year, for 2022, saving on license and on personnel costs. Skoda is also expanding its conversational AI, offering 13 additional regions. It's also going to be in Sweden. So I encourage you, if you are calling in from Sweden, do go out and buy a Skoda and support your favorite Software as a Service company. So with that, I'm going to leave it over to Mr. Torgren.

Thank you, Per. So moving on to the key financial highlights line. So that's Slide #7. I think -- I mean, overall, I think we see a very strong growth trajectory on all sales metrics. I think that was evidenced also by Per's initial speak here. So net sales amounted to SEK 9.8 million in Q1 '22 (sic) [ '21 ] versus SEK 10.1 million in Q1 2022, so up 3%. However, more importantly, our reported recurring revenues amounted to SEK 8.8 million in Q1 2022 versus SEK 6.6 million in Q1 2021, so up 34%. And I mean, this is very sad. It's not satisfying as this is one of our key KPIs. And the recurring revenues as a percentage of total sales is also increasing. And as you can see in the bar graph to the lower right, it was 87% in the quarter. And of course, we want to increase this, going upwards. And also as we are kind of phasing out any kind of professional services, this will continue to grow as well. And as Per also said, I mean, this is the first time we are also showing SaaS ARR metric, and that is a key metric going forward. And the SaaS ARR is based on the SaaS recurring revenues, so that is subscription, API calls and searchable data revenue streams. And it's calculated basically based on last month in quarter revenues, multiplied by 12. It's also outlined in our quarterly report in more detail, but yes, just to illustrate. The impact from our new customer wins that we announced during 2021 on SaaS are starting to be visible in our SaaS revenues, but we are still ramping up. And we can also see that converting legacy customers can also come in, I mean, anywhere in a month. So I think, also now in Q1, we have 1 customer that is in the process of converting into the SaaS model and has kind of converted and been kind of perceived as a SaaS customer. But that will also take a bit of time until they are up and running fully and where we can see also the revenues in the -- in SaaS revenues basically. So that can also be important to take into account. And also, as you can see in the top-right graph, the SaaS recurring revenues constitute 34% of total recurring revenues. And this is also a number that we expect to grow as we add more customers to the SaaS model and also as they are ramping up on the API call volumes. And also, as Per said, I mean, earlier, this is the first time we are disclosing our API call volume data for SaaS customers, and we increased with 84% from December to March 2022. So it is -- I mean, we are very pleased with this growth rate, but also, we have to recognize that we have many customers that we still see have a significant scale-up opportunity from current levels going forward. We'll not go into details on adjusted versus reported numbers, but we can just see that the delta between adjusted and reported numbers are starting to converge, and that's also why we have also decided to focus only on reported numbers also for simplicity matters. But however, we will also kind of showcase adjusted numbers in the interim reports during 2022, but that is more for comparative purposes. So the focus will be on reported numbers. And also, I think, I mean, overall, as I said, we continue to experience quarter-over-quarter sales growth on all our relevant SaaS metrics, so all in all, very satisfying trends that we can see in the quarter and also going forward. We continue to keep cost control even if we are increasing OpEx somewhat, but that's also something we have guided for in previous reports, and EBITDA in the quarter amounted to minus SEK 17.9 million. That is, of course, adjusted EBITDA. Cash position, end of quarter, amounted to SEK 84 million. So overall, we are on a positive revenue trajectory and our recurring revenues and the SaaS ARR are growing in a good way, even if there is still potential for more revenue impacts from the customer wins that we had during 2021. Next slide, please, so Slide #8. This is a slide showing growth in recurring revenues, numbers that we already saw on the previous slide, but more graphically. And I think the fact that our recurring revenues keep on growing, and also is a key metric for us in building a SaaS company, this is very satisfying. So the increase from Q1 2021 to Q1 2022 grew from SEK 6.6 million to SEK 8.8 million. So that's a growth of 34%. Also, on an LTM basis, we also see that the recurring revenues are growing from -- starting from Q3 2021 and also the growth from Q4 2021 to Q1 2022 of 7%. So overall, I mean, we can see that we are a bit kind of on this journey of transitioning from the old model, based on a hybrid model with licenses and support, together with professional services. Now we're going into the phase where we also start to again show significant growth, and that is very positive, I think. Also worth mentioning here on this slide. I think noting that Q1 and Q2 2021 were soft quarters for us, given the changes we carried out in Q4 2020, I think also the comparable numbers to Q2 2022, will consequently be softer, and our LTM recurring revenues have solid chances of continuing growing from Q1 2022. So yes, what's also positive is that we see a continued strong commitment and high increase in our SaaS offering from our existing customers, and we expect more of them to join the SaaS model as we progress during 2022 and 2023. So we expect the SaaS recurring revenues to continue growing and growing faster than our legacy customers. But also, the strong point is also the fact that we have very pleased customers, evidenced by our high renewal rate, as Per discussed about earlier. Next slide, please, so Slide #9. SaaS business model ramping up. Our SaaS volumes are continuing to grow as we expect, and 2 key KPIs for the SaaS model is the monthly API call data or volume and the SaaS ARR. And the monthly SaaS API call volumes grew with 84%, I mentioned earlier. And this KPI is an indicator on how our customer applications or the customer's application and usage of them are growing. And the more application solutions-covered region, et cetera, the higher API call volumes we can have. So this is a very good indicator of activity, basically. The SaaS ARR grew with 37% December versus March. And in the monthly SaaS revenues, we have also converting customers entering the SaaS model end of the month. So on a pro forma annualized basis, I think the ARR would have been higher than the SEK 12.9 million. But overall, we are very pleased in the strong growth on 2 of our key KPIs going forward. So very pleased with that. And next slide, please. This slide is -- you can see the SaaS revenue model and its different revenue streams. And the graph also highlights the scalability in the SaaS model. And obviously, the API call data volumes are related to the API call revenues in the Teneo Engine. So we have basically 3 main revenue streams: one is subscription revenues from Teneo Studio. So that's based on number of users, which you can see in the reddish part of the graph. And then we also have API calls generated in Teneo Engine, based on the number of API calls, and that's the purple part of the bar. And then we have Teneo Data, which is basically searchable data. And it's still a lower portion of the total SaaS revenues. And to the right, you can also see more details on the sales metrics, which we can dig into a bit through the call. But we have also shown this model in the past presentations as well. But overall, I think looking at the API call volume data and also on this illustrative large customer illustration of potential to generate revenues in our SaaS model, it's clearly so that it's the API call volumes that are key for actually making the big difference in the volumes of our total revenues. So therefore, it's very satisfying that we are growing the API call volumes in the way we are doing. And also, as Per mentioned, it's also done looking at small versus large customer. You can also see that, of course, it's generating high volumes, and API call is generally easier with a large customer than a small customer. And our customers tend to be usually quite large and blue chip customers. So a very highly scalable model and of course, this is very much linked to the API call revenues and the API call data generated in our platform. Next slide, we are moving over to our OpEx. As previously guided for, we are doing select and careful investments in sales and marketing primarily, and that is basically to further accelerate our growth. And we are increasing our run rate OpEx from SEK 117 million in Q4 2021, to SEK 124 million in Q1 2022. On a monthly basis, the increase is not very significant, and we have monthly OpEx a bit over SEK 10 million per month. And also, I mean, we have [ commercial ] recruitments and we'll continue to do recruitments to accelerate our growth. And that will somewhat increase the OpEx run rate levels from the Q1 levels. But still, I want to also note that we are careful on increasing our cost base and do this in a careful manner and steer it as we wish, basically. Moving on to the next slide, showcasing with our cash position in Q1 2022. What we can say is, in the quarter, we had cash flow from operations, excluding extraordinary items, that amounted to minus SEK 19 million. And we also had our cash and bank position that was negatively impacted by transactional costs associated with our debt funding that we concluded in Q4 2021. So that had a significant impact on our cash flow basically. But on a kind of more operational level, we were at the level of SEK 19 million, minus, during the quarter. So we have a cash position of SEK 84 million when we entered Q2 2022. We think this is a solid cash position that enable us to drive and execute on our strategy in a good way. With that, I'll leave over to you, Per.

Excellent. And I'm going to use Slide 13 to provide a quick summary of where we stand. So our technology has been valued at SEK 1.6 billion. It's because we've been in this industry for a long time. So we have some of the foundational patents. We're using that technology, of course, to produce 34% growth in recurring revenues, which we're very happy with that headline number. Compared to before we started this journey, which is Q1 2020, we've reduced our cost for a total of 30%. So we do have good cost control. And now, we are growing the revenues on that pace. We are part of Microsoft Azure. You probably saw, and maybe you didn't, but the quarterly report of Microsoft showed also that Azure is the fastest-growing cloud in the world today. And there's a good reason for that. And we particularly work with the 1,700-plus LUIS customers, and that's the language interface of Microsoft, which is what we're partnering with. The team, a large portion of the team comes from the company, Amelia, which is a SEK 13 billion Software as a Service in the same space. It is more of a virtual human, a virtual assistant, but the same conversational AI space. So we already built a business in that space. Our CAGR in the market is 22%. So you see, we're actually growing a bit faster than the market. But of course, still no -- but there is no leader in our market, which I think is a good challenge. The total market, SEK 130 billion, if you translate that into Swedish krona and also what we've implemented in the SaaS, but also some other initiatives, means that we have an 82% carbon reduction versus the old business model that we had before, which is also quite important to us. So with that, I'll leave it over for Q&A.

[Operator Instructions]

Okay. Then I suggest that we close this call. And for -- you can also follow -- I know that Forbes is going to be interviewing me later today, so hopefully, that hits the redeye side during Monday, and you can see further -- some further questions [ from that day on this as well ]. So thank you very much for joining this morning. Headline news is that the model is working and it's going very, very well on the SaaS side. So thank you all for joining.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.